Background and aims School ethnic desegregation has been a topic of strong societal and educational concern. Research has examined the effects of ethnic school composition on students' interethnic relations with diverging outcomes and sometimes inconsistent results. In this review paper, we provide an assessment of this literature to explain why and when school desegregation might improve or worsen ethnic relations and to identify important future research directions. Approach We discuss different theoretical perspectives predicting positive versus negative aspects of school ethnic diversity: intergroup contact theory and the perspectives of group threat and power differences. Subsequently, we consider a number of school and educational characteristics that can moderate the impact of ethnic diversity on students' interethnic relations and that could be considered in future research. Furthermore, we discuss the need for studying underlying psychological and social processes as well as the importance of investigating interethnic relations in combination with academic adjustment. Conclusions School ethnic diversity is not enough to promote interethnic tolerance. It is important to examine diversity in relation to other aspects of the school environment that may influence how students respond to the ethnic diversity within school. Important factors to consider are the presence of multicultural education and inclusive school identities, student–teacher relationships, and peer norms and networks, but also the role of parents and of peer relations outside the school context.